Lending From Loans

The question whether a government employee who takes loans from the government and from his provident fund for constructing a house can invest this sum into building a property for the Hindu Undivided Family (HUF), of which he is the karta, came up for review before the Patna high court in Gajendra Narain vs Commissioner of Income Tax (1996) 89 Taxman 202. The high courts decision was in favour of the assessee and against the Revenue. The grounds on which the high court decided this issue in favour of the assessee are outlined in the subsequent paragraphs.

The assessee was the karta of his HUF. He purchased a piece of land, and made payment for it from the money earned by selling the agricultural produce belonging to his family and from his individual income. The assessees case was, that while constructing a house on this piece of land, he made a loan of Rs 60,000 to the HUF, from his provident fund and by selling his car. The rest of the amount was invested by the HUF. While assessing the HUF, the assessing officer held that the house was constructed by the HUF of which the assessee was the karta and, accordingly, he assessed the income from the house property in the hands of HUF. In his individual return, the assessee returned only his salary income and was assessed on that.

 

However, the commissioner issued a notice under Section 263(1), holding the assessment orders erroneous. The commissioner held that the investment made in the construction of the house was from the individual source of income of the assessee, as the loan taken by a government servant for the purpose of constructing a house both from the government and the provident fund, could not be passed on or given as loan to others.

The Income Tax Tribunal also accepted the commissioners views and held that the assessee was 50 per cent co-owner of the house with his HUF and directed to assess 50 per cent of the income from house property in the hands of the assessee.

The basis of this decision against the taxpayer upto the Tribunals stage was that the assessee having taken the loan from the government and withdrawn money from the provident fund in his individual capacity and in his own name for the construction of his house could not advanced the same to the HUF. The commissioners ground in this order under Section 263 were, that the bulk of the investment made in the construction of the HUF house was from the individual source of income of the assessee, i.e loan from the government, loan from the provident fund and sale proceeds from his motor car. He was of the opinion that the loan taken by a government servant for the purpose of building a house from the government could not be given as loan to others and not utilised for the purpose for which it was drawn. Accordingly, the commissioner set aside the assessments. There was however no dispute from the departments side that the assessee did, in fact, advance loans, out of the amount taken as loan by him, to the HUF.

The high court did not find any substance in the tax departments arguments. According to the court the revenue in this case, was not much concerned with the source from where the income was derived. Earlier, assessments for income from house property were rightly made in the hands of the HUF and it was not relevant for the income tax authorities to know if the assessee could have given loan to the HUF for building a house or otherwise, from the amount which he himself had obtained as house building loan from the government, in addition to taking an advance from the provident fund.

If the advancement of loan by made the assessee out of the amount received as loan by him is in violation of government rules, then it will be for the government to take action against him and the revenue had no valid grounds to raise objections.

Therefore, the Tribunal was not justified in holding that a government servant could not provide the same as loan to his HUF for constructing his family house. The Tribunal was also not justified in holding that the assessee was 50 per cent co-owner of the house along with his HUF, merely because the house building loan taken by him from the government was also utilised in the construction of the HUF house and, therefore, the direction to assess 50 per cent of the house as property income in the hands of assessee was not legal and valid.

The decision of the high court is a pragmatic one, giving relief to the taxpayer on valid grounds. The existence of the HUF being in no doubt and the taxpayers claim having been accepted by the tax department initially, there was no such grievous error as to justify action under Section 263 by the CIT. When court decisions have established that even strangers can give gifts to an existing HUF, there seems to be no ground to deny the status of a HUF property to a house constructed for the HUF but with the loan provided from the individuals resources, who also happens to be the karta.